Pension fund default regulations, your 3-step guide
In a few days, the revised default regulations in terms of Section 37, 38 and 39 of the Pension Funds Act will be fully enforceable. Most retirement fund administrators and providers have been working tirelessly to ensure that they are fully compliant with the new default regulations.
In our previous post, Cornerstone Employee Benefits discussed the impact the new default regulations will have on you, the consumer, as well as the many benefits it will hold. In this article, we will take a more in-depth look at each of the new regulations, what they mean and which rules apply to each of them.
The new default regulations consist of three main areas of improvements, each with its own rules, benefits and impacts. Below is a summary of each regulation as published by Momentum in their Legal Update in September 2017 
Default investment portfolios (Regulation 37)
A default investment portfolio is a portfolio for members of occupational funds who do not specifically choose how their retirement savings should be invested. The Default Regulations require a board of trustees of a defined contribution pension and provident fund to provide one or more default investment portfolio to its members. The default investment portfolio must comply with the following principles:
- it must be appropriate for members who are automatically placed in that investment portfolio;
- the members must be adequately informed of the composition of the assets and the performance of the default investment portfolio. The Financial Sector Conduct Authority (FSCA) may prescribe the frequency and format of this communication;
- it must be reasonably priced and competitive; the members must be informed of all the fees and charges;
- passive and active investment options must both be considered as investment options;
- there must not be any loyalty bonuses or complex fee structures;
- the member must not be locked into the default investment portfolio and should be allowed to instruct the fund to transfer their retirement savings account to other investment portfolios at least every 12 months through member investment choices.
- it must be reviewed regularly to ensure that it continues to comply with the Default Regulations.
Default preservation and portability (Regulation 38)
The Default Regulations 38 requires retirement funds to offer a default in-fund preservation arrangement to members who leave the employment of a participating employer. The funds should allow such members to leave their accumulated retirement savings in the fund and become a “paid-up” member without paying any additional fees. When a member is no longer employed with the participating employer, the fund must make that member paid-up until the member instructs the fund, in writing, to either pay out or transfer the benefit due to him. The fund must give the member a paid-up membership certificate within 2 calendar months of becoming aware that the member is no longer employed by the participating employer. In addition, funds should be able to automatically accept members’ balances from other retirement funds to ensure members’ retirement savings follow them from employer to employer. The fund rules should be amended to specify the following for paid-up members:
- no new contributions will be accepted;
- no deductions will be made for risk benefits;
- any defined benefit amount must be converted to and preserved as a defined contribution amount;
- how these members qualify for death, retirement and early retirement benefits; and
- they must have access to retirement benefits counselling before any withdrawal benefit is paid or any transfer is made to another fund.
- Investment portfolios for paid-up members.
Default annuity strategy (Regulation 39)
Pension, pension preservation and retirement annuity funds are required to have a default annuity strategy in place for their members. If the rules of a provident or provident preservation fund allow for a member to choose an annuity, it must also have a default annuity strategy. The default annuity can either be an in-fund or out of fund. It can also be either a living annuity or a life annuity. The default will be a “soft default”, which means that a member needs to be given the option beforehand as to which type of annuity they would prefer, i.e. members “opt-in” instead of “opting-out”. The default annuity strategy must comply with the following principles:
- it must be appropriate and suitable for the specific classes of members;
- where the annuity is a living annuity, the members must be regularly informed of the objective, asset class composition and performance of the underlying investment portfolios. The FSCA may prescribe the format of the communication;
- the fees and charges must be reasonable and competitive;
- members must be informed of all the fees and charges and the impact on their benefits. The FSCA may prescribe the format of the communication;
- members should be given access to retirement benefits counselling at least three months before their normal retirement age;
- trustees of the fund must review the annuity strategy annually to ensure that it continues to be appropriate for the members and continues to comply with the Default Regulations.
We believe in empowering our clients and members of funds through knowledge and understanding and we trust that this article has given you a good overall understanding of the new default regulations. If you have any other questions, please contact Cornerstone Employee Benefits today and remember to follow us on Facebook and LinkedIn for more useful and interesting content.
 Momentum Legal Update, no 24 of 2017, September 2017. https://bitly.com/ No copyright infringement intended.